Pentagon faces prospect of $52 billion in cuts

By Andrea Shalal-Esa and Phil Stewart

Thursday, July 11, 2013

WASHINGTON -- U.S. Defense Secretary Chuck Hagel warned on Wednesday the Pentagon would have to take draconian steps next fiscal year, including funding cuts for hundreds of weapons programs and possible layoffs of civilian workers, unless Congress acts to stop $52 billion in spending cuts.

"I strongly oppose cuts of that magnitude because, if they remain in place for FY 2014 and beyond, the size, readiness and technological superiority of our military will be reduced," Hagel wrote in a letter to the top Democrat and Republican on the Senate Armed Services Committee released on Wednesday.

Defense spending cuts, known as sequestration, were initially meant to force the White House and Congress to find other ways to cut the budget. But policymakers failed to reach a deal on cutting the deficit, which meant that Pentagon spending will have to be cut by nearly $500 billion over 10 years, on top of $487 billion in cuts already planned for the same time.

Cuts in funding for training and "readiness" could lead to more accidents and would leave the country with less firepower to respond to a new national security crisis, Hagel said.

"In the event of a major military contingency, they might leave the country without the ready forces needed to fight effectively," the former senator told his colleagues.

He added in his letter, "The Department hopes to avoid a second year of furloughs of civilian personnel, but DOD will have to consider involuntary reductions-in-force to reduce civilian personnel costs."

Shares of U.S. weapons makers remained strong after the letter's release, despite a growing sense of pessimism across the sector, with one analyst suggesting that the lack of specific program cuts meant that industry executives had more time to jockey for position.

"We urgently need congressional support in enacting difficult but necessary measures proposed by the president in his FY2014 and prior budgets," Hagel said.

Cuts of 15 to 20 percent might be needed in the Pentagon's investment accounts, which include procurement and research and development, even though the overall Pentagon budget would be reduced by only 10 percent under the mandatory cuts, Hagel said.

He said that challenges in cutting military personnel and their medical benefits meant the cuts would again fall disproportionately on weapons procurement. The Pentagon requested $167 billion for procurement and research and development in the fiscal 2014 budget.

'UGLY PICTURE'

Hagel said the military services would protect most or all funding for a few programs, but hundreds of others would face significant cuts.

"We would be forced to buy fewer ships, planes, ground vehicles, satellites and other weapons," Hagel said. "Defense industry jobs would be lost."

Byron Callon, an analyst with Capital Alpha Securities, said the letter painted such an "ugly picture" it could galvanize Congress to act to avoid the cuts, but he noted that similar threats failed to avert the cuts from taking effect in 2013.

Jim McAleese, a Virginia-based defense consultant, said the Pentagon's response was still too vague on details about the likely effect on nuclear forces, aircraft carriers and Army brigades to spur lawmakers into action.

"This was one of the last trains leaving the station," McAleese said. "The lack of details increases the risk that the Department of Defense will endure a full sequester in fiscal 2014."